What IP Was Stolen From Google, And Where Does Morality Come Into The Picture?

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  • on January 17th, 2010

There is still much speculation and little true knowledge about what really drove Google’s ($GOOG) decision to publicly state that it is “no longer willing to continue censoring our results on Google.cn” and may consider shutting down their operations in China. We know Google was hacked, some of their intellectual property was stolen, and they now believe they can not achieve the objectives they articulated when they launched Google.cn in January 2006. This post will add to that speculation.

Google’s decision to enter China involved both ethical and business inputs. The China market is hard to resist, and they believed they had a shot at building a significant business in China while making some compromises in the belief that “the benefits of increased access to information for people in China and a more open Internet outweighed our discomfort in agreeing to censor some results.” Google also built a formidable R&D function in China with several hundred engineers. At the time of the 2006 China launch Google did not yet have a meaningful enterprise Google Apps business.

Whatever happened over the last few weeks changed the balance of inputs into Google’s decision to operate in China. Many have said Google suddenly had a moral awakening, many have also have said that Google is using these attacks as a pretext to exit a losing business in a blaze of glory. I don’t think it is that binary. Google China’s business is not small for most firms–estimates are in the $300-400m range for 2009, less than 2% of its global revenue–and is growing, but the current regulatory regime will ensure that they never overtake Baidu or be allowed to gain much more share. However I do not think the China revenue was the issue.

What IP was stolen from Google? Most of the reports focus on external hacker attacks and phishing/malware efforts that allowed unauthorized access to “accounts of dozens of U.S.-, China- and Europe-based Gmail users who are advocates of human rights in China”. But if the attacks were purely external, does it makes sense that all Google China engineers lost access to Google’s code repository on the day of the announcement? Or did something more nefarious happen in their China operations involving the theft by a local employee of sensitive code?

Which brings me back to the shifting balance of inputs that may have precipitated this decision. When Google launched in China in 2006 they did not have a meaningful enterprise business. Now they do, with many corporate and municipal customers, and apparently even a chance at Gmail becoming the email provider for the US government.

A major security failure such as a successful hacker intrusion and theft of intellectual property, especially by a foreign state, could put much of Google’s burgeoning enterprise business at risk. And in the current environment having a significant engineering operation in China would only exacerbate security concerns. So perhaps the inputs for this decision included not only the China market and ethics but also the risks to the development of their global enterprise business.

Google is making a very difficult decision. Withdrawal from China may very well be the correct choice for the company and its shareholders. Until Google discloses exactly what happened in the attack we don’t have enough information to really know what precipitated this major strategic change. So the criticisms for using a PR stunt to exit a struggling business, and the praise for reclaiming some kind of lost moral high ground may both be premature.

I want to elaborate on a quote I made to TechCrunch’s Sarah Lacy in her article “Google’s China Stance: More About Business Than Thwarting Evil?“. In discussing how Yahoo ($YHOO) may have outplayed Google in China, I said “Not often Yahoo looks smarter than Google.” Kara Swisher, in an interesting column, took offense at this, saying the idea that “’Yahoo played China far better than Google’ was utterly perplexing, given that it glossed over the key part regarding tragic victims of Yahoo’s cloddish missteps there.” I was talking only about Yahoo’ business and its mission as a for-profit corporation. Yahoo’s 40% stake in Alibaba group is already worth billions of dollars. If, as I believe it will, Alibaba eventually becomes the most valuable Chinese Internet company, Yahoo’s stake could be worth tens of billions of dollars. Other than the South African media firm Naspers with its $10B+ stake in Tencent ($HKG:0700), no other western Internet company is likely to earn anywhere near as much money as Yahoo may in China.

What do you think? Please let me know in the comments.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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